Uber Bear Sees ‘Super Spike’ In VIX

Lots of investors assume that the quiet in the stock market won’t last long. But one noted bear on stocks is reiterating her two-year old call for a “super spike” up in volatility, the likes of which haven’t been seen since the depths of the financial crisis.

Abigail Doolittle, founder of Peak Theories Research, wrote in a note to clients Friday that, like many technicians, she believes the CBOE Market Volatility Index, or VIX, could double off recent lows to within the 18-to-22 range, just like it has several times the last couple years.

The VIX was down 2.5% to 12.25 in recent trading, as the S&P 500 gained 0.2% to 1934. The market’s so-called “fear gauge” has gained 14% since it closed at 10.73 a week ago, the lowest level seen since February 2007.

Ms. Doolittle noted that VIX bulls point to a “falling wedge” pattern that has been building in the short-term daily charts since early February, characterized by steadily lower highs and lower lows. They argue, she said, that the current pattern looks very much like the ones that preceded upward spikes in the VIX to around 18 to 22 and pullbacks in stocks in December 2012, June and October of 2013 and February 2014. Those VIX highs were seen around pullbacks in the S&P 500 ranging from 4.1% in October 2013 and 7.7% in November 2012.

VIX (click for bigger image)

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“For many, a move to about 22 would qualify as a true spike up in the VIX and something that the daily chart…makes a strong case for, and probably this summer,” Ms. Doolittle wrote.

But that’s kid’s stuff. Ms. Doolittle is much more bullish on the VIX, and bearish on stocks, for the long term.

She said a five-year “falling wedge” pattern in the weekly chart “continues to make the case that it has been making for more than 2 years now,” for a surge not just to the “Flash Crash” high near 50 in 2010, but to the October 2008 high near 90. That would represent an eight-fold jump in the VIX off last week’s low.

VIX (click for bigger image)

FactSet

When the VIX peaked at an intraday high of 89.53 on Oct. 24, 2008, a little more than a month after Lehman Bros. blew up, the S&P 500 hit a low of 852.85, which is 56% below current levels.

She said the recent “calm before the storm” in stocks sets the stage for “an explosive unwind” of pent-up energy that has been building for five years.

“And that — 90 or higher — undoubtedly qualifies as a super spike higher in the VIX, and something that the long-term charts suggest may just be ahead, even though the precise timing is less clear on vagaries of the VIX’s five-year ‘falling wedge,’” Ms. Doolittle said.